Problem 3-10

Table 3.10 illustrates the supply and demand schedules for calculators in Sweden and
Norway. On graph paper, draw the supply and demand schedules of each country.



a) In the absence of trade, what are the equilibrium price and quantity of calculators
produced in Sweden and Norway? Which country has the comparative advantage in
calculators?

b) Assume there are no transportation costs. With trade, what price brings about
balance in exports and imports? How many calculators are traded at this price? How
many calculators are produced and consumed in each country with trade?

c) Suppose the cost of transporting each calculator from Sweden to Norway is $5. With
trade, what is the impact of the transportation cost on the price of calculators in
Sweden and Norway? How many calculators will each country produce, consume,
and trade?

d) In general, what can be concluded about the impact of transportation costs on the
price of the traded product in each trading nation? The extent of specialization? The
volume of trade?

Quantity
P3-10(a) Sweden Norway
.
.
.
.
.
Equilibrium price = $30
Equilibrium price = $15 . . Quantity = 600
Quantity = 600
Sweden has the comparative advantage .
. .
.
1600 2000 1200 1600 2000 400 800 1200 800
$35
$40
$45
0 400
$5
$10
$15
$20
$25
$30
Quantity
P3-10(b) Sweden Norway
.
.
.
.
.
At $22.50:
Price that bring balance = ($15+$30)/2 . . Quantity Demanded = 900
= $22.50 Quantity Supplied = 300
Quantity Demanded = 300 Quantity Imported = 600
Quantity Supplied = 900 .
Quantity Exported = 600
. .
.
400 800 1200 1600 2000
$15
$10
$5
2000 1600 1200 800 400 0
$20
$45
$40
$35
$30
$25
Quantity
P3-10(C) Sweden Norway
.
.
.
. With the transportation cost of $5
Cost of Swedish unit = $15+$5=$20
. Equalization price = ($30+$20)/2
= $25
At $25:
With the transportation cost of $5 . . Quantity Demanded = 800
Price = ($25 - $5) = $20 Quantity Supplied = 400
Quantity Demanded = 400 Quantity Imported = 400
Quantity Supplied = 800 .
Quantity Exported = 400
. .
.
400 800 1200 1600 2000
$15
$10
$5
2000 1600 1200 800 400 0
$20
$45
$40
$35
$30
$25
P3-10(d)
In general prices do not equalize. Less specialization occurs. A smaller trade volume takes place.